The volume of loans granted by Russian banks to the real sector of the economy has increased by almost 20% during the first seven months of this year. With larger customers to foreign financial institutions, Russian banks have started to pay attention to small- and medium-sized borrowers. More and more credit institutions are developing special small business loan programs

The overwhelming majority of loan applications from small enterprises come from trade and retail. “Loans granted to retail and trade businesses make up half of our credit portfolio, services account for 30%, and manufacturing companies account for 29%,” says Emmanuel Decamps, an EBRD consultant responsible for business development at KMB Bank. Trade is a priority in particular for those banks that have started active operations relatively recently, when most attractive manufacturing borrowers had already established good relations with financial institutions and did not need to attract additional funding as desperately as the fast-growing trade industry. “We started in 1998, when large banks were collapsing and enterprises were switching to small- and medium-sized banks for services,” relates Alexei Kryukov, a vice-president at Moscow Credit Bank, or MKB. “Loans were required by enterprises operating in expanding markets, and first and foremost in trade.”
Nevertheless, trade is by no means the only lot for banks providing services to small and mid-sized businesses. Merchants themselves often get involved in production. Accumulating initial capital through trade, many companies soon become both trade and manufacturing enterprises.

It is not hard to borrow a small sum (up to a few thousand dollars): express- and micro-loan services require a few documents certifying that a business is real and proving its owner’s identity. However, according to bankers’ estimates, most potential customers are screened out at this stage of preliminary acquaintance with bank requirements. Those who meet the criteria complete a credit application and their odds of obtaining a loan are as high as 75-85%.
Many banks consider express-crediting programs the first step toward closer contacts with a customer. Naturally, those who want to obtain financing for larger sums and longer terms must meet higher requirements. Also, the procedure for checking such borrowers is more complex. A credit experts’ personal visual acquaintance with a potential customers’ business is an important element in assessment. “We understand that in order to achieve success in working with borrowers, we need to go and see them for ourselves, and our people are ready for this. We meet directors, understand how the business is developing, how it operates, its turnover and products, and, based on our experience, we assess its financial abilities,” says Emmanuel Decamps.
Handling smaller sums and a greater number of borrowers forces banks to reduce their overhead. The banks’ know-how is their most important asset. By bankers’ own admission, there is still room for improvement. “It takes about two weeks to collect and analyze accounts for a medium-sized business, but we cannot afford to work this way with small business. Besides, there are no real accounts there. We use scoring methods to make a loan decision based on a set of scores. Of course, in doing so, we take higher risks but are in a position to influence them by setting initial requirements for borrowers – for example, limits depending on the volume of business, its location, character and sector classification,” explains Alexei Kryukov from MKB.
It’s now common knowledge that small businesses require special approaches, but it’s too early to speak about standards, yet. “In principle, the approach must be different, as we don’t want to spend the same amount of time analyzing a small customer as a large one,” admits Roman Dugayev, Head of the Customer Business Development Department at MDM Bank. “But one should bear in mind that small customers are more risky”.

When problems with servicing loans arise, banks are keen to come to an amicable agreement with a customer, at first. “We try to find out what’s going on: either we have underestimated the business or some external problem independent of the borrower has occurred– for example, demand for the product has changed or the borrower has used loan resources inefficiently and made bad managerial decisions,” relates Igor Basalov, the Head of the Commercial Crediting Department at Globex Bank. A business may develop so rapidly that there are not enough loan resources for it. In this case, the best decision would be to increase the amount of the loan. “We can propose, for example, that a customer repay the loan in small installments on a daily basis, or we can consider repayment from future business of the owner of an enterprise,” Oleg Skrobot explains.
If negotiations are to no avail, banks can take further action under the contract and proceed to dispose of the loan. For the present, bankers point to borrowers’ discipline: a share of overdue debts at the largest banks doesn’t exceed 4% at the average value of 0.9%.

What is holding back loans to the real sector then? One set of problems is linked with the very nature of business, the established stereotypes playing a considerable role in addition to objective obstacles like limited transparency, poor quality corporate governance, personnel issues, and vulnerability to market changes. “Businesses often limit themselves. Many new customers are afraid of banking services. They just don’t think it will be simple. They fear that they will be required to submit a pile of documents,” Emmanuel Decamps complains.
Interest rates are the next deterrent. They have fallen by five points on average for ruble loans since the beginning of the year and the reduction has mostly affected short-term credit. But, in Igor Basalov’s opinion, current rates are not optimal. In trade, for example, competition is severe and profitability lower than the interest rate. The results of a survey of enterprises conducted by the Central Bank to monitor the economic situation in Russia prove the above statement: most respondents were not ready to borrow at the rates higher than 19% per annum in rubles and 12% per annum in dollars. The lack of good ways of working with small borrowers also constitutes a certain problem.
Nevertheless, bankers estimate loans to grow 20% a year, driven by small and mid-market business. Foreigners, too, are showing interest in this segment. The US Agency on International Development gives 50-percent guarantees backed by the US government of loan portfolios granted to small and medium businesses. Four Russian banks – BIN Bank, Rossiisky Bankirsky Dom (Eng. Russian Banking House), TsentrInvestBank and SDM Bank – are now working under this program.

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